Delhaize retrenches

BRUSSELS – Disappointing second quarter results at its Food Lion operations have prompted Delhaize Group to lower its full-year profit projection and scale back its store expansion plans.

Management also declared it has identified another 200 million euros in potential savings beyond its previous target of 500 million euros by the end of 2012.

Operating profit from Delhaize’s United States businesses, which include Food Lion, Hannaford and Sweetbay Supermarkets, fell 18.8% to $211 million as sales declined 2.8% to $4.68 billion. The consolidated operating margin of the U.S. chains decreased 89 basis points to 4.51% of sales.

First half operating profit in the United States decreased 12.8% to $459 million on a 1.6% drop in sales to $9.35 billion.

Comparable-store sales for the American outlets contracted 3.6% during the quarter, mainly because of a weak sales performance at Food Lion and the negative impact of Easter’s timing. Management points out that Hannaford, based in the Northeast, performed well.

The comp-store sales performance was sharply lower than the 0.8% decrease expected by analysts.

In addition to the top-line weakness, the sharp drop in operating profit reflected a slight decrease in gross margin due to price investments made at Food Lion at the start of 2010 that were only partially offset by favorable changes in the sales mix at Hannaford. Although selling, general and administrative (SG&A) expenses increased as a percentage of sales, dollar expenses were flat, thanks to operational cost savings from better store labor scheduling, staff reductions and store closings at the start of the year.

Executives emphasize that the U.S. economic environment remains challenging, particularly in the Southeast and Florida, where consumers continue to exercise prudence and engage in cherry picking to find the best prices. “We have seen a very aggressive promotional environment in the United States in the second quarter, with retailers relying heavily on discounted prices to generate traffic,” said Pierre-Olivier Beckers, Delhaize’s chief executive officer, during a news conference.

Food Lion is not the only Southeastern grocer to find the going tough recently: Jacksonville, Fla.-based Winn-Dixie Stores Inc. recently announced that it would close 30 underperforming stores and consolidate its operating structure because of ongoing sales pressure. In fact, the environment has remained harsh for many supermarket operators across the country. Both Safeway Inc. and Supervalu Inc. recently reported double-digit declines in quarterly net profit as identical-store sales faltered.

In response, Delhaize management reduced its consolidated operating profit guidance for the year to a range of negative 2% to positive 2%. Its prior forecast was for an increase of 2% to 5%.

The company also trimmed its capital expenditure budget to 700 million euros from 800 million and cut its planned store openings worldwide to a range of 82 to 92, down from 102 to 122.

"While we are disappointed in our Southeast United States sales numbers, we believe they are not reflective of the underlying strength and the long-term growth potential of the business," Beckers emphasized in a statement. "We are committed to our strategic price investments started at the beginning of the year at Food Lion and believe that we have the right value proposition to respond to the needs of a pressured consumer."